Subtracting Insult from Injury: How You Can Use California's "survivor Bill of Rights" to Protect the Homes of Grieving Heirs

• Publication year: 2017
• Author: By Lisa Sitkin, Esq.

SUBTRACTING INSULT FROM INJURY: HOW YOU CAN USE CALIFORNIA'S "SURVIVOR BILL OF RIGHTS" TO PROTECT THE HOMES OF GRIEVING HEIRS

By Lisa Sitkin, Esq.^*

INTRODUCTION

When a California homeowner falls behind on mortgage payments, both state and federal law require the loan servicer¹to communicate with the homeowner about the delinquent loan and, in most cases, provide an opportunity to apply for a loan modification or other foreclosure avoidance option before proceeding with a foreclosure. Until recently, however, there was no privately-enforceable state or federal law that explicitly required a loan servicer to engage in any kind of pre-foreclosure "loss-mitigation" process when the homeowner was a successor to the original borrower named on the home loan. As a result, surviving spouses, children and other heirs throughout California have lost their family homes in foreclosure while still grieving over a loved one's death.

With the passage of SB 1150, the "Survivor Bill of Rights" (SBOR),² California now provides successors with rights similar to those enjoyed by original borrowers under the state's Homeowner Bill of Rights (HBOR). In this article, the author provides an overview of the major provisions of the new law and offers practice tips for attorneys representing successors-in-interest facing foreclosure. Section I provides background history to contextualize the problem. Section II reviews the major provisions of the law, including important limitations on its application.³ Section III provides practice tips for attorneys representing successors-in-interest who may be at risk of foreclosure.

I. BACKGROUND

A. The Homeowner Bill of Rights and Federal Loss Mitigation Regulations

Before the foreclosure crisis that started in late 2007, mortgage servicers generally dealt with borrowers in default on a case-by-case basis, using some combination of factors-including income, nature of hardship, and property value-to determine whether to offer a loan workout of some kind.⁴ This "loss-mitigation" process was often haphazard, confusing, and chaotic. Servicers devoted few resources to default servicing, and there were no industry standards, external regulations, or laws protecting borrowers from foreclosure while they were in review for assistance.

When the number of borrowers in default exploded in 2008, the country saw a tidal wave of foreclosures, many involving borrowers who might very well have qualified for a loan modification or other workout option. Even as loan-modification programs became more systematized in 2009,⁵servicers regularly failed to communicate with delinquent borrowers and complete reviews, frequently issuing wrongful denials. Borrowers often did not have time to get decisions or appeal wrongful denials before the house was lost.

Consumer advocates nationwide began pressing for robust protections against "dual tracking"-i.e., the practice of proceeding with the foreclosure process while a borrower was under review for assistance. Some states developed court-supervised mediation programs, but those were not especially useful in California where the vast majority of residential foreclosures are completed without any court involvement through a statutory non-judicial foreclosure process.⁶ Instead, California advocates sought passage of state laws that would give borrowers enforceable due process rights during the loss-mitigation process.

After three years of advocacy and lobbying by a range of organizations, including, in the final year, the Attorney General's office, California enacted the Homeowner Bill of Rights (HBOR), which became effective January 1, 2013. HBOR requires, among other things, that mortgage servicers of first-lien residential home loans provide defaulting borrowers with specified information about the loan, payment status, and loss-mitigation options and procedures. Most importantly, HBOR prohibits a servicer from moving forward with the foreclosure process once a borrower has submitted a complete application package for a loan modification. It also requires servicers to provide detailed information in writing about any denial decision and an opportunity to appeal before foreclosing on a property.⁷

Soon after HBOR went into effect, the Consumer Financial Protection Bureau (CFPB) issued federal loan servicing regulations that provide similar (though in several ways weaker) protections to borrowers.⁸ These federal regulations, which became effective in January 2014, bar the initiation of foreclosure proceedings until a loan is at least 120-days delinquent. In California, this rule prohibits the recording of a Notice of Default before a borrower is at least four months behind on mortgage payments.⁹

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B. The Non-Borrower Successor Problem

As the foreclosure crisis continued, consumer advocates also saw a disturbing increase in foreclosures involving surviving spouses and other heirs to residential property whose names were not on the loan documents. In many cases, loan servicers refused to speak to successors at all, citing inapplicable privacy laws that they claimed barred them from speaking to anyone other than the named borrower or a person authorized in writing by the borrower.¹⁰ This practice led to nonsensical-and deeply upsetting-requests for authorization forms signed by the deceased borrower. In other cases, the servicer would insist that the successor present letters of administration from a probate court even when the successor was a surviving joint tenant who already held title to the property by operation of law, or the trustee of an inter vivos trust that held the property as an asset.

For successors who were able to maintain mortgage payments and did not need any information about the loan beyond what the servicer was already sending to the deceased borrower at the property address, these communication obstacles were generally not a major problem. Under federal law, lenders and servicers may not accelerate a loan just because title to the property has transferred as a result of the borrower's death,¹¹ so the successor could simply continue to make payments on the loan. If a successor in this situation wanted to assume the loan (i.e., have it transferred into the successor's name), the procedures could be more involved, but many successors did not want or need to assume the loan.¹²

In contrast, successors who could not keep up with the payments after losing the deceased borrower's income, or whose home loans were already delinquent before the borrower's death, were unable to obtain crucial information about payment status or payoff amounts that might allow them to resolve the delinquency or refinance the loan.

Even when a servicer would communicate with a successor regarding a delinquent loan, the servicer would routinely refuse assistance, insisting that (1) only a named borrower could sign a loan-modification agreement, and (2) a delinquent loan would have to be fully reinstated before a successor could apply to assume the loan and become a named borrower. Successors therefore faced a catch-22: most of the time, they needed a loan modification to bring the loan current, but they could not get a modification until they assumed the loan, and they could not assume the loan unless the loan was current.

Advocates started lobbying servicers and regulators to address the non-borrower successor problem by adopting clear rules about communications with, and loss-mitigation procedures for, deceased borrowers' successors.

C. Developments Outside California

Servicers themselves did very little to address the successor problem, but some regulators at the federal level responded to the advocacy on this issue by adopting rules and guidance designed to encourage servicers to speak to, and work with, successors.

First, the Federal Housing Finance Agency, which oversees secondary mortgage markets, including the Government-Sponsored Entities (GSEs) Fannie Mae and Freddie Mac, directed the GSEs to issue guidance to servicers of GSE loans.¹³ The Fannie Mae guidance, applies to transactions exempt from the due-on-sale requirements imposed by the Garn-St. Germain Depository Institutions Regulatory Act, including transfers as a result of a borrower's death.¹⁴ This guidance requires GSE loan servicers communicate with new owners in exempt transactions and evaluate loan-modification requests from new owners as if they came from a named borrower.¹⁵ The Freddie Mac guidance provides for simultaneous modifications and assumptions, after a borrower's death, by someone "like a surviving spouse" with an ownership interest in the property, and requires servicers to provide loan information to transferees with confirmed legal or beneficial interests in the property.¹⁶

As part of its mortgage servicing regulations, the CFPB included rules in its servicing regulations requiring servicers to adopt policies about communications with successors-in-interest. The regulations require that servicers advise successors as to what documents they must provide in order to communicate with the servicer and, if they choose, apply to assume the loan. Servicers must also inform successor of their options regarding the loan and must create policies for simultaneously suspending foreclosures and processing requests for assumptions and loan modifications.¹⁷

The Treasury Department also enhanced the rules for its (now expired) Making Home Affordable (MHA) loss-mitigation programs by requiring participating servicers to treat verified successors like borrowers.¹⁸

Advocates were able to use these rules to help many successors through non-litigation advocacy, but there was very little a successor could do when a servicer refused to comply because none of these regulations or guidelines provided a means for direct private enforcement. The CFPB rules...